Saturday, August 16, 2008

Class Project at New Ruskin College

The figure bellow shows the home values from 2000 to the present. Now class who can complete the right side of the figure? Do you think the prices will continue to go down at the same rate, or will the line go up from here, or will the line go out at some angle? (Note class that the line does not have to stop at the base line. It can go on and fall right through all the gains run up in the 1990’s also. It can dive down very deep destroying equity all the way down.)

Sunday, August 10, 2008

Pround Houses at New Ruskin College

The baby boom generation bought the American Dream and by the beginning of this century the competitive drive to own ever larger Mc Mansions finally ended with the bursting of the housing bubble as we have seen. The plan, if plan there was, apparently was for 76 million baby boomers to sell their houses to 48 million Generation X’ers. At the height of the bubble the portion of Americans who were homeowners reached 69%. As explained in Part II this is not coincidental. The bubble required ever more buyers to be brought into the market. For every Mc Mansion sold a buyer had to be found for the apartment which had just been converted into a condominium.

The bubble burst from sheer exhaustion. The supply of buyers was exhausted. And the credit line of those market participants was also exhausted. The American savings rate is now negative. It is estimated that the losses from mortgage defaults will total as much as two trillion dollars; this when the total capital of the banking system is $1.3 trillion. The average American family in addition to all those house mortgages which are daily exceeding the market value of their homes, and by ever larger margins, now has $8,000 in credit card debt, and all this debt is the private debt only.

We have been as profligate in our public finances as we have in our private finances. Let us not forget the national debt which is $32,000 per person and that public indebtedness grows when the Social Security System and the Medicare System are combined bringing the total debt to some $175,000 per person.

Household income has been flat in the 21st century for all income groups yet housing more than doubled in the twenty metropolitan composite of the S&P/Case-Schiller index. (see figure Lecture Notes 08-15-08 in Lecture Hall) Income simply could not support further expansion of the housing bubble. Therefore bust.

“Froth” --- Dr. Greenspan

Right now there are 19 million housing units of all types vacant on the market, 35% above normal, according to David Rosenberg North American economist with Merrill Lynch & Co. Of these 4.5 million were previously occupied homes and were listed for sale at the end of June, according to the National Association of Realtors. Of these 750,000 were bank owned. These numbers could easily treble as homeowners start walking away from their mortgages that exceed the market value of their homes. And Dr. Greenspan himself thinks we are not near the bottom. It was Dr. Greenspan who denied the existence of the bubble and whose policies were primarily responsible for the bubbles dramatic increase during the Twenty First Century. “The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long. They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly. This fed the credit and housing bubble . . .” (Nouriel Roubini, Barrons, 8-2-08)

The New York Times reported: “Most of the economists who were interviewed blamed Alan Greenspan, the chairman of the Federal Reserve from 1987 to 2006, for his unwillingness to clamp down on either the technology stock bubble or the run-up in housing prices.” (Abha Bhattarai, New York Times, 8-5-08)

Yet in fairness to Dr. Greenspan it must be acknowledged that Australia, Great Brittan , Ireland, and Spain have all experienced similar housing bubbles. A generation came of age and bought houses with an acquisitiveness not seen before in history. It is difficult not to believe that something more than merely shelter was being pursued. Were they grasping at something less tangible? What was it they were looking for? Was it an attempt to find community? To try and differentiate themselves from their peers? Or to try and out do their parent’s home? All the proud houses were symbols of a success they longed for and could make tangible by simply signing a mortgage document. As the bubble continued it was easy to come to think of the home as a kind of saving account or retirement account. The national media encouraged the frenzy to buy homes or trade up. Time magazine on its cover showed happy homeowners watching their home take flight. There was no downside. No risk. Why had no previous generation discovered this way of wealth creation?

Madame Bovary Life Style

That the housing bubble was driven to such heights by people whose incomes were static or, in the case of the lower income groups, actually declining, is evidence of how available credit had become. A deliberate policy decision was made in Washington by the Clinton Administration to lower lending standards to push up the percentage of Americans who were “homeowners.” Never mind that they were owners only in the narrow sense that their names were on the mortgage papers. Many of these mortgages were no down payment loans with no principle and below market interest for 2 or 5 years. Everything depended on prices going up higher and higher.

With the negative savings rate, and accumulating debt public as well as private it is difficult to see how much longer Madame Bovary can go on. Everything our oligarchic elite could do to rig the market to the advantage of homeowners has been done: tax sheltering of income for homeowners, tax sheltering of capital gains, government subsidized loans, exclusionary zoning and building codes to reduce supply, any thought of savings has been abandoned, and now most recently with a $300 billion Housing Bill to help 400,000 homeowners. But in the end the market has tossed these attempts to rig the housing market aside as if they were so many toys.And I think people are beginning to see that they have been mislead. There is no such thing as a consumer society. There is only a society in which people work and plan for the future and save money to finance their projects or there is profligacy and no savings for the future and society disintegrates. In the end Madame Bovary committed suicide.